Story Stream
recent articles

Over the past year, Congress has spent a conspicuously large amount of its limited legislative time in efforts to constrain the activities of pharmacy benefit managers, or PBMs. Four different House committees and three Senate Committees have held hearings or marked up proposed legislation that addressed PBMs. With many must-do items and looming deadlines (such as avoiding a government shutdown, for example) and not a lot of legislative days on its calendar, it’s worth asking why it has focused on this industry. The flurry of motion on the issue suggests it has little to do with actually reducing drug prices. 

Pharmacy benefit managers administer pharmacy benefits for health plans on behalf of employers, unions, and government agencies. Part of their responsibilities entails negotiating with drug makers to lower the price of their drugs, and as a result they generally have a contentious relationship with drug makers for limiting their profits. Despite their valuable role in the drug supply chain, Members of Congress on both sides of the aisle are working on a variety of legislative proposals that would severely constrain PBMs in numerous ways. 

For instance, one such proposal would effectively prohibit any contract that rewards PBMs for the size of the price discount they obtain on a drug via negotiations, a provision referred to as delinking. The ostensible reason for it is to prevent PBMs--the demonized “middlemen” from making too much money--but it would completely destroy their incentives to reduce drug costs for their customers, since obtaining bigger discounts would not bring them higher revenue. The arrangement would effectively push Medicare and employers back towards a fee-for-service model and away from the value-based payment arrangements that CMS and private insurers have been trying to implement, while also increasing costs. PBMs are compensated based on how effectively they secure savings from drug companies and pharmacies, which is both why they are effective and why pharmaceutical companies resent them. One recent analysis noted that annual federal spending on Medicare Part D premiums would increase $3 billion to $10 billion as a result of such legislation.  

Another critical point the legislation ignores is that rebates on prescription drugs are not correlated to the prices that drug companies set, even though proposals to delink PBM compensation from list prices seem to assume that PBM compensation and rebates somehow force manufacturers to raise list prices. 

Plan sponsors have a choice on how to compensate and contract with PBMs. At a time when health care costs continue to increase, constraining their ability to contract with PBMS will increase drug costs. It’s unclear why politicians who generally advocate for free market policies feel compelled to push for a policy that limits the prescription drug market without a beneficial outcome for taxpayers. 

Pharmaceutical companies and other opponents of the status quo like to assert that PBMs exploit the rebate system and that rebates constitute pure profits and do nothing to reduce overall drug costs in the market. 

However, government agencies have acknowledged that efforts to rein in PBMs would do nothing to save taxpayers or patients money: Studies published by both the Government Accountability Office and the HHS Office of the Inspector General found that the rebates PBMs negotiate are passed along to plan sponsors in Part D to lower the costs of premiums for beneficiaries and taxpayers alike. What’s more, the consulting firm Oliver Wyman found that rebates reduced aggregate drug costs in Medicare Part D by $35 billion.

One way to end the confusion over rebates and what PBMs do would be to amend the Robinson-Patman Act and allow PBMs to negotiate price discounts directly with the pharmaceutical companies. Such a step would prevent regulators and Congress from continuing to insist that PBMs are simply unproductive “middlemen” who gobble up profits without providing anything in return and would make discounts easier to see. 

Pharmacy benefit managers are one of the few mechanisms we have for constraining pharmaceutical prices. We should think carefully before taking steps to constrain them. 

Ike Brannon is a senior fellow at the Jack Kemp Foundation. 

Show comments Hide Comments